Editorial: Hopes and fantasies for the yuan

The nation’s central bank has said that people in Taiwan can begin onshore Chinese yuan-denominated transactions including deposits, exchanges, remittances and loans next month, after China’s central bank finally signed a pact with the Bank of China’s Taipei branch allowing it to conduct yuan-clearing in Taiwan. Would it be too soon to expect a substantial expansion of the yuan market here and for Taiwan to move closer to becoming a major offshore center of trade in yuan?

Since the inking of a memorandum of understanding on a currency clearing agreement across the Taiwan Strait on Aug. 31 last year, allowing full convertibility between the New Taiwan dollar and the yuan, policymakers have expressed interest in developing Taiwan into a second offshore yuan business center, after Hong Kong, on the back of growing demand for direct currency settlement amid expanding cross-strait trade and tourism. Financial experts have also made it known that they intend to include the yuan in their portfolios to take advantage of the currency’s potential appreciation.

There are good reasons for facilitating yuan use here: It would enable people to make yuan-based deposits and remittances at onshore banks in Taiwan, allow individuals to freely convert yuan and transfer funds between accounts, let companies use yuan for settlement for imports from China or investment in China, allow Taiwanese banks to offer yuan-denominated loans to companies, engage banks in providing yuan-related wealth management products to individual investors and let companies issue yuan-based bonds in Taiwan, to name just a few.

Based on almost 10 years of development of the yuan market in Hong Kong, coupled with Taiwanese banks’ strong drive to develop the yuan business and people’s preference for the higher interest rates of yuan deposits compared with those offered for the New Taiwan dollar, experts in the banking industry have forecast yuan deposits will account for 5 percent of Taiwan’s total deposits in three to five years.

However, to decide whether Taiwan has the potential to become an offshore yuan trading center or even develop into a yuan-based fund-raising hub for companies in the longer term, the government needs to ask itself a question: Has enough planning and preparation been made to safeguard the nation’s financial stability in the wake of the upcoming opening of direct currency exchanges and capital flows across the Taiwan Strait?

There was one thing in the central bank’s press conference on Friday that everyone should keep in mind: Its warning that people should remain vigilant about the Chinese currency in terms of restricted cash flow, credit risk and its exchange fluctuation. If people and companies do not agree with the central bank’s warning, they should not indulge in any fantasies about future yuan-based financial products and services.

As for China, can it move forward at the same pace as Taiwan? Looking at China’s strong control over its capital accounts and its still tight regulations on inward and outward remittances, the prospect for making Taiwan an offshore yuan trading center does not seem immediately encouraging, nor does the longer-term plan of becoming a yuan-based fund-raising hub for corporate entities.

The effectiveness of the cross-strait currency settlement system will surely have a profound impact on both individual and corporate entities’ financial management and the nation’s financial development. However, this will need the government to continue negotiations with its Chinese counterpart in easing capital flow restrictions and other banking-related barriers if Taiwan hopes to become one of the world’s major yuan business centers.